What is the difference between principal trading and agency trading?

While principal trading aims to create profits for the firm's own portfolios, agency trading earns commissions or fees and provides liquidity to the market. This article delves into the clash between principal trading and agency trading, exploring their differences in terms of risk, objectives, expertise, and the types of firms involved.

What is agency trading?

In agency trading, the broker is an intermediary between the exchanges and the clients. The broker does not take positions in the market but simply executes trades based on the client's instructions. The benefit of agency trading is that it is much less risky than principal trading, as the brokerage is not exposed to the same level of market risk.

What are principal and agent trades?

On other occasions, you are only making a trade with your broker. These two main types of trades are known as principal and agent transactions. Principal trades involve a brokerage's own inventory of securities, while agency trading involves trading with another investor, potentially at another brokerage.